/biz/ - Business & Finance

[Anonymous No.11848388]

Tell me what retarded mistake I'm making on this option calculator. Trying to hypothetically short.

Current stock price: $3.50
Jan put buy strike price: $2.50
Price per option (ask): $0.60

Yet when I check around Jan 18th expiry, it's saying I lose 80% of invested capital if share price hits $2.40

Wtf?

[Anonymous No.11848410]

>>11848388
Hi i am a wall st. spawn. They signed me up to be their life extension but I don't know how to fly their ship. Everything is glitchy as hell and all I see is pictures of handcuffs and slave references. Have I been dupped? What is this button that says "https://www.youtube.com/watch?v=nmtw8grnnUM"?

Will it send me to #80526B?

[Anonymous No.11848460]

>>11848388

You didn't mention the cost of commissions, and that really needs to go into the calculation, but you didn't, so I won't in the math.

If the strike price is $2.50 and the price of the option is $0.60, your break-even would be anything below $1.90 (=2.50-.60)

so if the price hits $2.40, you still haven't reached break even.

You say this is a hypothetical, but if it's a real stock, give me the symbol and I will run it through my routine and post you a break-even chart to give you a better answer.

With options, you have to dig into the math of all options. Sometimes buying a different strike price has a much better profit potential

[Anonymous No.11848484]

>>11848388
Link to calculator? Could be that you're accidentally selling the Put option, rather than buying it.

[Anonymous No.11848492]

>>11848460

Hey, thanks man. Already making more sense. Let's look at AXSM.

Clinical trial results in Jan 2019, so let's say price either drops or goes up several fold. Looking at those puts.

Also, why not just buy further out contracts? Profit seems to be higher as event is happening sooner than expiration

[Anonymous No.11848504]

>>11848484

Definitely buying it. Found one of my problems, you have to click a button to expand price range. Price range was set up for calls I suppose, so it was confusing. Wasn't listing far enough down in prices, only listing higher and higher prices

http://www.optionsprofitcalculator.com/calculator/long-put.html

[Anonymous No.11848513]

>>11848504
>>11848460
Yeah, this anon is right.

>>11848492
Options which have a longer time to expiry will be more expensive, all else being equal.

[Anonymous No.11848560]

>>11848492

I would NOT buy put options in AXSM right now for two reasons....

1. They are very thinly offered. At least on e-trade, there are only 3 strikes available: 2.50, 5.00 and 7.50

2. They are way overpriced.

You said the results are in January. The nearest expiring options after january would be March 15. Because there are only 3 strikes, this chart is going to look weird, but here it is anyway.

Column AY will show you the total cost to buy 1 put at each strike. But now pay attention to column BA, that is the break-even price.

If you notice, none of them will make you money until the stock pretty much collapses. the $7.50 puts won't break even until the price drops below 2.55, and the 2.50 puts won't break even until the price drops below 1.65

I put in an estimated future price of 2.50 (which is where the projected profits column is calculated off of). But even at that, you would only be making $4.60 off of a $487.70 investment.

And since with options it's either make money or lose all, that's really not the sort of risk you would be looking for. (or at least not the kind I would be looking for)

[Anonymous No.11848593]

>>11848560
Do you do this for a living/substantial side-income?

[Anonymous No.11848596]

>>11848388
are u retarded

[Anonymous No.11848626]

>>11848492

I'm going to give you another example, because there are a lot more strikes for sale it it goes toward proving a point I was talking about.

This is a table for IQ, expiring in March of 2019.

Look at the break even column (BA) for the puts.

If you notice, the break even on the 45 strike is 19.95. But the break even on the 42.50 strike is 20.05

This is the sort of price imbalance you can't see without doing the math ahead of time. In this case, you could spend $260 LESS for the 42.50 strike, and still have a better profit potential

And, if you think the price is going to go down to 18 (an 11% drop), you can still pull in a 16% profit (even after commissions) with an investment of $807 if you went with the 27.50 strike.

As always, it's about hunches and guesses. But with options, if you do the math on all the strikes and expiration dates, you can really get a good idea of how much a stock has to move up or down before your calls or puts are in the money.

>>11848593
yes

[Anonymous No.11848658]

>>11848626
Could you please explain how you're calculating the prices for the different Calls and Puts, are you using the Black Scholes equation, or are you just getting it of some website?

[Anonymous No.11848669]

>>11848388
Try to learn from the best anon.

[Anonymous No.11848698]

>>11848658

No, the prices are the given in this worksheet. I trade through e-trade. So I go to a stock and look under options. It then give me a list of strike prices, bid/ask, and volume date. I grab it all and copy. I then go into the spreadsheet and click a button, which reads the clipboard and populates the table and then does all of the break-even etc calculations.

This image shows what I see in e-trade. The chart I posted is simply a screenshot from an excel worksheet/program I wrote.

[Anonymous No.11848737]

>>11848658

And as far as Black Scholes, while I realize that a vast majority of the world believes in greeks & Black Scholes and use them, I don't really trust them for 2 reasons...

1. the formulas are all based on European options, and they admit that the truth math of Americans aren't the same, so there is a fudge factor.

2. They handle the fudge by changing the implied volatility (making it a calculation instead of an independent factor).

So while I will look at greeks and, to a certain extent, pay attention to them, I don't feel totally cool trusting my money with them (even though there are people who do and seem to make a lot of money at it)

[Anonymous No.11848755]

>>11848698
Oh nice, I was just wondering, because I was looking at your other worksheets.

also with this:
>If you notice, the break even on the 45 strike is 19.95. But the break even on the 42.50 strike is 20.05

is your main focus the payout of outcomes, rather than the likelihood of outcomes?

[Anonymous No.11848782]

>>11848626
>>11848698
>>11848737
>>11848755

I'm enjoying this conversation, learning a lot already. Keep it going, In way over my head. Still trying to grasp buying a put at a strike price higher than current stock price

[Anonymous No.11848788]

>>11848669
KEK

[Anonymous No.11848850]

>>11848755

> other worksheets.
Ya, I bought a pile of options books a while back. I bought "Trading Options Greeks" because it's considered a must-read, and the worksheets were my notes and some rough calculations as I was studying it.

> where is your focus?
It's an odd sort of thought process, but here's how it roughly goes....

1. Pick a stock ( I generally keep an eye on the same 15-20 stocks all the time. By watching them over time you get a general feel for how they move and within what ranges)

2. Do I think it's going to go up or down?

3. Look at either the call or put side of the calculator.

4. From there, I try to find one where either the break even is as close to the current price as possible, or has the furthest range in the money. So, with the IQ example, if I go with a deep in the money put (like 42.50), the option will still have value (at least for a little while) even if it moves in the wrong direction, giving me time to rethink or run for the hills.

5. Then I mentally measure how right I think I am, and that tells me whether I am willing to risk the total cost for the potential profit. So in the IQ case, I might be willing to risk $807 for the $27.50 strike because the break-even is only $1.01 below the current price.

6. Then at some point before or after all this, I will look at the chart for the last 6 months (or less depending on the expiration) to see if it has ever hit my target price.

7. But in terms of profit, I look more toward the percentage than the dollars. But... the dollars also matter because I'm not going to risk a lot if the payout is low. For example, the $22.50 strike would make me 3.41%, but only $18.15 off a 400 risk.

[Anonymous No.11848853]

>>11848788
>Someone finally gets the joke

[Anonymous No.11848865]

>>11848782

It's an important thing to learn early. On my first options trade, (before I learned to do the math first), I would look at the current price and the strike price. Then when the price went down close to the strike, I was still losing money and I felt like a dumb ass.

When you buy a put with a strike above the current price (known as "in the money"), it gives you wiggle room.

For example, if the current price is $10 and you buy a put thinking the price will go down, what happens if the price goes up? If you've bought near the strike price, your option becomes immediately worth it because you have an option to sell at a price lower than the current market value.

But if your put is for a higher (or even a much higher) price, even though you are still at a loss, the option still has intrinsic value, so you don't lose ALL of your investment

[Anonymous No.11848877]

>>11848865

Should have read.... "if you've bought near the CURRENT price, your option becomes immediately WORTHLESS because you have an option to sell at a price lower than than the current market value"

[Anonymous No.11848899]

>>11848850
Thank you for these detailed answers. I assume you don't look much into out of the money options then, you just look for in the money options, which have the best break-even price?

[Anonymous No.11848959]

>>11848899

I sometimes look at out of the money options (especially calls). It depends on whether I am committed to the belief that a stock is going to move. Out of the money are always cheaper, and sometimes they are so cheap that the risk is much better For example, in the IQ example from before, look at the price of the 20 strikes (that are close in the money) and the 15 strikes (which are fairly well out of the money).

In that case, you could buy 3 options at 15 for the same as 1 option at the 20. So if it moves where you want it, you would make even more money going that way.

But there's also something else to consider, long term options (called LEAPS).

This table is still IQ, but it's the chart for options that expire in January 2021. You pay a bit more for the extra time, but it's probably worth it because....

1. You have 2 years til expiration and a lot can happen in 2 years.

2. As options get close to expiration, their price decays. If you buy an option that is 2 years out and sell it in the first 6 months or so, you have almost no time decay.

(that last part is like when you buy a car that is 1 year old and sell it when it is 3 years old. You lose almost nothing on the value of the car, so it's like driving it for free)

[Anonymous No.11849013]

>>11848899

More about out of the money calls....

OTM calls are always cheaper than ITM calls, because with ITM you are paying for the intrinsic value of the option. (same with puts in that regard)

But OTM calls are also a place to make some serious coin. For example, consider the option chart IQ3 that shows the year chart.

IQ has been on a roller coaster, and their 52 week high is 46.23 (current price 20.36). What would happen if they hit 46.23 again in the next two years?

Well, if you were to go with a 30 strike, a $517 investment would give you a $1297 profit.

OTM calls are cheap because they have a lower probability of being worth anything at expiration, but when they hit, they hit with some pretty spectacular profit.

You just have to go into it knowing that in 99/100 times, you will lose your entire investment

[Anonymous No.11849067]

>>11849013
It seems like the approach of buying in-the-money options would be better for a lot of beginners (assuming their using directional strategies, with unlimited downside risk), because at least they'd have the chance to recoup some losses, should things not go their way.

[Anonymous No.11849079]

>>11849067
I've never traded options, myself

[Anonymous No.11849097]

>>11849067

The nice thing about options is that the risk is not unlimited. If you're buying and not selling options, the maximum loss is everything you've invested.

That's why buying a put is always a better idea than shorting a stock, which has unlimited risk.

But yes, I am extremely conservative, I am willing to pass up higher profits in exchange for less risk. I know that I don't make as much money as a lot of people who take huge risks, but then again I also don't have to worry about doing a youtube video when I am busted.

[Anonymous No.11849099]

>>11849067
Actually, I shouldn't use the term "unlimited" downside risk, because buying options literally limits risk to the amount you initially pay.

[Anonymous No.11849115]

>>11849097

This is what piqued my interest. If I'm trying to short these biotech stocks and one of them hits, I royally fuck myself.

BRB short $10k worth of a stock, next it opens up 500% higher. Might as well shoot myself.

Puts seem like the best option to limit risk.

[Anonymous No.11849122]

>>11849115
Yeah, I see how it could help to manage things like gap risk

[Anonymous No.11849124]

>>11849067

But to answer more to your question...

Yes, when you are starting out, the best plan would be to find puts with the highest break-even and calls with the lowest break-even (taking into account the dollar amount you are willing to risk).

Which, again, is why it's important to do the math like in the charts I'm showing. IQ as an example again: at a current price of 20.36 you might think "it's going down, so I'll just go with a 20 strike put". But once you do the math, you realize that it's nowhere near the best choice.

[Anonymous No.11849132]

>>11849124
Yeah, definitely. Thanks again.

[Anonymous No.11849135]

>>11849115

This is the textbook example of why you NEVER want to do a straight short... man goes to bed with $37k in his account, wakes up the next morning and he suddenly OWES $106k.

Unlimited risk is a suckers bet.

https://www.marketwatch.com/story/help-my-short-position-got-crushed-and-now-i-owe-e-trade-10644556-2015-11-19

[Anonymous No.11849179]

>>11849132

Of course now to add the exception....

It's not ALWAYS best to go with the highest breakeven. It's a balance between risk and reward.

Look at the IQ example again, and compare the 42.50 strike and the 27.50 strike. (and see image here)

with the BE being 20.05 and 19.35 respectively, is it worth the extra $1430 in cost/risk to buy the extra $0.70 in breakeven? Probably not, especially since with the 19.35 BE we're still only talking about $1.01 from the current price. So in that case, the 27.50 strike probably has the better risk/reward

[Anonymous No.11849237]

>>11849179
Good point. But the fact that there's such a huge price disparity between the 2 ITM options would kinda indicate to me that the market is pretty doubtful of further downward movement. And I get that it's mainly because one had a lower Strike than the other, but surely the difference shouldn't be that big?

[Anonymous No.11849284]

>>11849237

Most of the price of the ITM puts is based on the intrinsic value of the option.

IV = the current real value of the option. So, with the price at 20.36, the $50 option is already 29.64 in the money, and could be sold for that amount above the current price.

The IV on the 27.50 strike is only 7.14

[Anonymous No.11849323]

>>11849237

OK, I'm going to split. It's getting late, and I have a lot of cooking to do in the morning.

[Anonymous No.11849384]

>>11849323
You should check out /ck/. Those guys are crazy about options